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California’s IOUs may be difficult to cash in

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With the California controller getting ready to send out the first batch of IOUs on Thursday, banks in the state are still trying to figure out if they want to buy the warrants from depositors. If they decide not to, get ready for crunch time and most likely the emergence of some kind of distressed debt market that will scoop up the IOUs – at a price – from those desperate for cash.

Just because the IOUs are sent to a specific person, business or local government doesn’t mean that they can’t be traded in or simply just traded. Whoever ends up holding them by their maturity date can redeem them with the state. And there’s certainly enough IOUs coming down the pipeline to make for a nice liquid market.

The controller expects to send out $3.36 billion IOUs this month alone, if the state can’t fix its finances. And there will be plenty more to come in August and September, when the cash shortfall is projected at $3.7 billion and $6.5 billion, respectively.

But there is a catch. California will stamp an Oct. 1 maturity date on the IOUs, but will only redeem them if there is sufficient cash available.

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